Big money funds’ fees outpace investor returns

The biggest U.S. money market funds have done a better job of preserving their management fees than many realize, a development that may surprise investors whose dividends have plummeted 96 percent from peak levels five years ago.

Investors collected $5.24 billion in total dividends from money funds in 2011, a 72 percent decline from $18.6 billion two years earlier and a huge plunge from the $127.9 billion gained back in 2007, before the Federal Reserve chopped short-term rates to near zero.

In contrast, the fees collected by money fund sponsors declined to $4.7 billion last year, a 57 percent drop from 2009 and a 52 percent decline since five years earlier, according to data from the Investment Company Institute, the trade group for the fund industry.

[dmc-related-post-wp numitems="3" title="Also read"]

The biggest retail funds in the industry did even better, showing fee declines of less than 25 percent since 2009.

“Many sponsors have seen a drop in management fee income – however, not nearly on the level that investment income for investors has declined,” said Scott Sullivan, a senior analyst at research firm Celent.

The big players have demonstrated plenty of resiliency in even the most trying market conditions, said Pete Crane, who runs research firm Crane Data. Large funds, which generate far more in fees than are needed to pay for their managers, credit analysts and other expenses, have enormous economies of scale, he said.

“The money fund industry has yet to see any real consolidation or the exodus of a major player,” Crane said. “If the pressure were that acute, you would see fees being introduced.”

While most of the decline in dividends has resulted from lower rates and fees absorbing a larger proportion of fund income, total assets in money funds have declined 13 percent over the past five years.

SMALLER FEE DECLINE

At Fidelity Investments, for example, the giant $116.6 billion Fidelity Cash Reserves generated at least $200 million in annual management fees in each of the past three fiscal years, which end on November 30. Over that time, the annual fee declined only 21 percent while net investment income for investors tumbled 98 percent.

Fees also absorbed a much greater proportion of available income last year. The fund’s management fee was $203.6 million in fiscal 2011, or nearly 12 times more than the $17.2 million in net investment income designated for investors.

In fiscal 2009, it was a different story for investors. They received nearly $1.1 billion in net investment income, four times more than the fund’s management fees of $258.2 million, the fund’s regulatory filings showed.

Fidelity’s fund is managed by a group of professionals out of a modest office in Merrimack, New Hampshire, about 60 miles north of the firm’s Boston headquarters. The fund lists only a single manager, Robert Litterst, a 20-year Fidelity veteran and the chief investment officer for money markets.

Fidelity, the largest money market fund manager in the United States, said the fund’s management fee expense ratio of about 17 basis points has been less than 90 percent of its closest peers in recent years. The company’s money market business is designed to handle extended periods of low interest rates, spokesman Vincent Loporchio said.

Much the same was true at Vanguard Group‘s Prime Money Market Fund, the No. 2 retail fund with $114 billion in assets. Over the past three fiscal years, the fund’s management and administrative fees declined by 23 percent to $154 million while net investment income for investors shrank by 94 percent, from $1.45 billion to $90.5 million.

Ultra-low interest rates are at the root of the diminished income for investors, a Vanguard spokeswoman said.